Study shows how to fix big flaw with 401(k) plans

retirement (Photo credit: 401(K) 2013)

CBS News:
By 

STEVE VERNON / 

MONEYWATCH/ October 1, 2013, 7:39 AM

(MoneyWatch) Most 401(k) participants plans are on their own when it comes to deciding how to turn their retirement savings into reliable, lifetime income. ... Most employers pay retiring employees a lump sum from the 401(k) plan and don't provide any help with the critical task of generating retirement income from that savings. 

... To set the stage for future changes, a new study from the Stanford Center on Longevity (SCL) and the Society of Actuaries (SOA) shows employers how they can help their older workers plan for a secure retirement. (Disclosure: I was the primary author of this report).

• 3 ways to turn your IRA and 401(k) into a lifetime retirement paycheck
• Study identifies major flaw with 401(k) plans
• Do it yourself retirement income

What are the challenges?

The long-term shift from traditional pensions to defined contribution and hybrid defined benefit plans places significant responsibility on retirees to generate lifetime retirement income. For example:

• Given people's longer life expectancy these days, the money set aside for retirement may need to last a long time -- potentially 20 to 30 years or more.
• Market volatility complicates the challenge of managing savings in retirement. Since 1987, there have been four major market meltdowns. Retirees can expect -- and should plan for -- more meltdowns.

• 

  English: Proportion of pay to save. (Photo credit: Wikipedia)

  Many employees don't know how to calculate the amount of savings they need to generate adequate income during their retirement. They often guess at this amount, and they usually guess too low. 



English: Retirement savings for various periods with squirrel and nut analogy (Photo credit: Wikipedia)

• There's also evidence that retirees are doing a poor job of managing retirement risks; many lack a formal plan to generate retirement income from their savings, and as a result, they're planning to spend down assets at an unsustainable rate. Others are under-spending in retirement for fear of running out of money, leaving them with less money for necessary expenses.

These challenges could all be addressed if 401(k) plan sponsors provided retirement income programs within their 401(k) plans instead of just pre-retirement investment vehicles. So why aren't more employers offering such programs? The primary reason seems to be how plan sponsors view their defined contribution plans. According to one study, 91 percent of plan sponsors view them as savings plans, while only 9 percent view them as vehicles for providing retirement income.

A cultural shift is needed: Employers and plan sponsors need to commit to operating their 401(k) plans not just as a way to save for retirement but as plans that help employees before and during their retirement.

Help is on the way

Several reputable financial institutions offer an array of retirement income products, including AllianceBernstein, Fidelity Investments, Financial Engines, Great-West Insurance, Guided Choice, Income Solutions, Prudential, Schwab, Transamerica, UBS and Vanguard. Many of these products and services are available on the platforms of 401(k) plan administrators, such as AonHewitt, Fidelity Investments, J.P. Morgan, Mercer, T. Rowe Price, Vanguard, Wells Fargo and Xerox/Buck. The bottom line is that plan sponsors now have realistic retirement income products they can offer in their 401(k) plans.

The SCL/SOA study provides employers with guidelines for selecting the products and services that employers can offer in their 401(k) plans and implementing a successful program of retirement income. The report describes common retirement income generators (RIG), such as annuities and systematic withdrawals, and provides projections of the amounts of retirement income that each RIG might generate. These projections show that a retiree's choice of a RIG can have a significant impact on the amount of income they'll receive, when they initially retire and throughout their retirement.

One important conclusion from the SCL/SOA study is that plan sponsors can significantly increase the amount of retirement income employees might receive by offering retirement income products that come with institutional pricing instead of the standard retail pricing individuals have to pay for such plans. Institutionally priced products have the potential to increase retirement incomes by five to 20 percent.

Plan sponsors and employers are uniquely positioned to help their employees convert their retirement savings into income without any economic incentive that might bias individuals' decision-making. This objectivity will help older workers retire with confidence and security.

If this scenario sounds promising to you, show this blog post to your employer and diplomatically ask them to consider implementing a program of retirement income in your 401(k) plan. Employers often respond to employee requests, and if enough of your coworkers make the same request, you can make it happen.

© 2013 CBS Interactive Inc.. All Rights Reserved.

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  For more than 35 years, consulting actuary Steve Vernon helped large employers design and manage their retirement programs. Now he's a Research Scholar for the Stanford Center on Longevity, where he helps collect, direct, and disseminate research that will improve the financial security of seniors. He also delivers retirement planning workshops and has authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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Annuitization of 401(k)s: DOL Safe Harbor Addresses Fiduciary Concerns

Employee Benefit Adviser:

By Jerry Kalish

June 24, 2013

This is another of my continuing articles on 401(k) In-Plan lifetime income products.

• The Next Big Thing for 401(k) Plans?
• Understanding Sponsors’ Concerns about In-401(k) In-Plan Life-Time Income Products

But let’s ditch the productization label, and refer to what’s happening with lifetime income concerns as the “annuitization of 401(k) plans.”

Here’s one of the basic concerns employers have with 401(k) annuities – fiduciary responsibility for the selection of an annuity provider or contract for benefit distributions.

The seal of the United States Department of Labor (Photo credit: Wikipedia)

Fortunately, the Department of Labor finalized its Regulation On Selection Of Annuity Providers--Safe Harbor For Individual Account Plans. In brief, the DOL says that a fiduciary can satisfy its responsibilities by:

1. Engaging in an objective, thorough and analytical search for the purpose of identifying and selecting providers from which to purchase annuities;
2. Appropriately considering information sufficient to assess the ability of the annuity provider to make all future payments under the annuity contract;
3. Appropriately considering the cost (including fees and commissions) of the annuity contract in relation to the benefits and administrative services to be provided under such contract;
4. Appropriately concluding that, at the time of the selection, the annuity provider is financially able to make all future payments under the annuity contract and the cost of the annuity contract is reasonable in relation to the benefits and services to be provided under the contract; and



The seal of the United States Department of Labor (Photo credit: Wikipedia)

5. If necessary, consulting with an appropriate expert or experts for purposes of compliance with the provisions of this process.

But remember, the so-called “Safe Harbor” does not by itself protect a fiduciary from its responsibility for selecting an annuity provider or contract. A Safe Harbor, in general, only reduces or eliminates a party’s liability if the party performed its actions in good faith or in compliance with defined standards.

So from a practical standpoint: a Prudent Fiduciary should consider hiring a Prudent Expert.

Jerry Kalish is President of National Benefit Services, Inc., a Chicago-based TPA firm. He has been publishing the firm’s Retirement Plan Blog since 2006. He can be reached at jerry@nationalbenefit.com.

This article is for information purposes and should not be considered tax or legal advice. Plan sponsors and participants should consult with qualified tax and legal advisors for the application of the law and regulations to their specific situations.

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Transforming your 401(k) into steady income

Retirement (Photo credit: 401(K) 2013)

A job and a paycheck - they go together like coffee and cream. But when you retire from your regular job, does that mean you have to give up the cream?
Reuters:

By Mark Miller

CHICAGO | Tue May 21, 2013 11:59am EDT

A growing number of 401(k) plans are including investment choices that can help savers convert nest eggs into retirement income. Participants can buy insurance annuities or other products designed to spread funds over a lifetime.

These programs aim to make 401(k)s more like traditional pensions. That's laudable if it helps retirees cope with "longevity risk" - that is, the risk of exhausting savings in a retirement of unpredictable length.

But the new retirement income initiatives have disadvantages too, so savers should proceed carefully. Here are some points to consider if one of them shows up in a 401(k) plan near you.

THE ANNUITIES PUSH

English: Types of Annuities (Photo credit: Wikipedia)

... Currently, only 16 percent of employers offer in-plan annuities, according to a Metlife survey. Employers worry about the complexity of administering an annuity option and the fiduciary responsibility of picking an insurance company, since retirees would need to rely on that underwriter to make payments for decades to come.

The industry is pushing two annuity types for the workplace market - fixed and variable. A fixed annuity allows you to purchase a specified amount of guaranteed income for life, with the payments determined by the amount you invest, prevailing interest rates at the time of purchase (higher is better) and when you want to start receiving the income. The payout on a variable annuity can vary, depending on the earnings of the investments within the annuity.

Either option can be immediate, meaning you don't buy it until you're ready to collect the income stream, or deferred, meaning that you buy it years in advance and let it grow before you tap it.

A popular type of variable annuity for retirement plans is the guaranteed minimum withdrawal benefit annuity, or GMWB, ... Here, you invest in a portfolio of stocks and bonds for 10 years prior to retirement; the initial withdrawal amount is linked to the amount in the account. Payments can rise in subsequent years if the portfolio investments beat certain pre-agreed benchmarks.

The advantage over other annuities is the guarantee: if you die before the assets have been used up, your heirs get what's left. Other annuities, in contrast, require you to surrender control of the invested funds when you start taking payouts, though they tend to offer higher payoffs.

A $100,000 investment in a GMWB might yield annual retirement income of $5,000 for someone retiring at 65, according to calculations from Josh Cohen, defined contribution practice leader at Russell Investments. If the portfolio performs really well, the annual income amount could rise to $5,750 at age 85, but the odds of that aren't good, Cohen says.

The same investment in a fixed deferred annuity would get the retiree $6,360 in annual income. Or, he could take a bit less initial income ($4,836) but get a 2.5 percent annual inflation adjustment that would spin off $7,900 annually at age 85.

Some companies are offering another option: A pre-set portfolio designed to generate income for the long haul. ...

GUARANTEED DRAWBACKS

GMWBs "can be mind-numbingly complex to understand, and it's difficult to figure out what they really cost," says David Blanchett, head of retirement research at Morningstar. They can be pricey, but those tucked inside 401(k)s benefit from lower institutional pricing. ...

Blanchett worries that putting annuities in 401(k)s could prompt some workers to purchase them prematurely. Because of the annual insurance costs, it only makes sense for older workers within a decade or so of retirement to jump in.

Even insurance sellers caution retirees not to annuitize all of their savings, so there are liquid assets left for large and unexpected expenses.

(The writer is a Reuters columnist. The opinions expressed are his own.)

(Follow us @ReutersMoney or here. Editing by Linda Stern)

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New proposed regulations could mean changes for employee retirement plans

Employee Benefit News:

By Sally Doubet King & Carolyn M. Trenda

April 23, 2012

Seal of the United States Department of the Treasury (Photo credit: Wikipedia)

... For several months, the Department of the Treasury, the Internal Revenue Service and the Department of Labor have been exploring ways to provide “income-stream” options for more retirement plan participants. The agencies have focused on finding a balance between lump-sum cash distributions (which provide liquidity) and lifetime-income options.

This past February, the Treasury and the IRS released two proposed regulations, and the IRS issued two revenue rulings, that provide different strategies for achieving such a balance. Here, we go over two:

Logo of the Internal Revenue Service (Photo credit: Wikipedia)

- A longevity annuity option, providing an annuity that begins at an advanced age under a defined contribution plan.

- A deferred annuity option from a defined contribution plan.

Longevity annuity option under defined contribution plan

To address the concern that retirees may outlive their savings, especially where the only retirement plan distribution received by the retiree is a lump sum from a defined contribution plan, the guidance package includes a proposed regulation that introduces a new concept, the “qualified longevity annuity contract." Such a contract would provide a stream of income commencing at an advanced age, such as 80 or 85, and would continue as long as the individual lives. ...

Under the proposed regulation, if a plan offered a QLAC, the QLAC would be disregarded in determining RMDs. Therefore, a participant would not need to commence distributions from the QLAC before the age selected under the QLAC contract.

Also under the proposed regulation, a QLAC would be an annuity contract purchased from an insurance company for a plan participant that satisfies each of the following requirements:

- Premiums for the contract satisfy a specific dollar limitation and percentage of assets limitation, i.e., the lesser of $100,000... or 25% of the account balance.

The contract provides that distributions must commence not later than a specified annuity starting date, and that annuity starting date cannot be later than the first day of the month coincident with or next following the participant’s attainment of age 85. ...

The contract does not make available any commutation benefit, cash surrender right or other similar feature.

There are no benefits provided under the contract after the death of the employee, other than a life annuity payable to a designated beneficiary.

The contract, when issued, states that it is intended to be a QLAC.

Additionally, issuers of QLACs are subject to certain reporting and disclosure requirements.

QLACs could also be provided under 403(b) plans and traditional IRAs, but not under 457(b) plans, defined benefit plans or Roth IRAs.

Note: Similar to the proposed regulation on partial annuity distributions, the new guidance on QLACs would be effective for contracts purchased after the publication date of a final regulation; in the interim, plans cannot rely on the proposed regulation.

Deferred annuities from defined contribution plans

The final piece of guidance is Revenue Ruling 2012-3. This ruling describes how the qualified joint-and-survivor annuity (QJSA) and qualified pre-retirement survivor annuity (QPSA) requirements in Code Sections 401(a)(11) and 417 apply when a deferred annuity contract is purchased under a defined contribution plan.

The ruling provides three examples that illustrate different deferred annuity design alternatives, each with different conditions: a revocable annuity, a fixed annuity and a fixed annuity with an election not to pay amounts attributable to matching contributions under the annuity contract in the event the participant dies prior to the annuity starting date. The ruling then provides an analysis of how each alternative would necessitate certain plan terms, including compliance with QJSA and QPSA notice, waiver and consent requirements.

The ruling clarifies that where the plan separately accounts for the deferred annuity contract, the remainder of the plan is not subject to the QJSA and QPSA requirements.

Future considerations

Employers may wish to provide comments to the Treasury on either or both of the proposed regulations; these comments must be provided by May 3, 2012. In addition, plan sponsors interested in the new options should evaluate how the options could be integrated into current plan design and communicated to participants.

For more information, contact Partner Sally Doubet King at            (312) 849-3684 begin_of_the_skype_highlighting            (312) 849-3684      end_of_the_skype_highlighting       or sking@mcguirewoods.com and Associate Carolyn M. Trenda at             (312) 849-8130 begin_of_the_skype_highlighting            (312) 849-8130      end_of_the_skype_highlighting       or ctrenda@mcguirewoods.com at the law offices of McGuireWoodds LLP.

Related articles

• Retirement: Ensuring a life-long income stream (business.financialpost.com)
• Proposed Regulation for QLACs (lawprofessors.typepad.com)
• The Individual Retirement Annuity Plan (moneymanager.com)